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PEMBELANJAAN PEMBELANJAAN PERUSAHAANPERUSAHAAN

PEMBELANJAAN PEMBELANJAAN PERUSAHAANPERUSAHAAN

LECTURE 4a – SOURCES OF LECTURE 4a – SOURCES OF SHORT TERM FINANCINGSHORT TERM FINANCING

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Short-Term FinancingShort-Term Financing

Alternative financing policiesAlternative financing policies Advantages and disadvantagesAdvantages and disadvantages

Sources of short-term financingSources of short-term financing Cost of each source of financingCost of each source of financing

Choosing a bankChoosing a bank

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Advantages and Disadvantages Advantages and Disadvantages of of

Short-term FinancingShort-term FinancingSpeed: faster than long-term credit

Flexibility: agreement generally less restrictive and if the firm’s business is seasonal, it may not want to commit itself to long-term debt for three reasons:

1. Floating costs are higher for long-term

2. Repayment penalties on long-term debt can be expensive, and

3. Long-term loan agreements contain provisions, which constrain the firm’s future actions.

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Advantages and Disadvantages of

Short-term Financing (Cont’d)Cost: interest rates are generally lower on short-term than long-term debt

Risk: short-term financing is at disadvantage to long-term, because of the extra risk that it carries

1. The lender can demand payment on short notice

2. The cost of the loan will increase if interest rates increase

PP/MB-IPB/10

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